Speed Bumps on the Road to Growth for China’s 3PLs

China’s logistics industry is gaining in importance and developing rapidly to support the nation’s manufacturing sector. This growth is strongly encouraged by the Chinese government, which aims to develop the country into a premium integrated transportation and logistics hub with supply chain management competence to strengthen China’s position in international trade.

In 2014, researchers from China’s Shanghai Jiao Tong University and Lappeenranta University of Technology in Finland conducted a study to identify global trends in the logistics industry, relevant opportunities and challenges, and how logistics companies can better position themselves in China. Currently, there is very limited knowledge about the Chinese 3PL industry, and the study provides unique insights for foreign companies planning to expand their logistics operations in the country. The study was conducted through focus group interviews with senior executives of leading third party logistics (3PL) companies in China, followed by a telephone survey of 70 3PL companies administered by Shanghai Jiao Tong University researchers.

The key strengths of the logistics industry in China that emerged from the study include good transportation connectivity and new infrastructure. One of the industry’s main weaknesses is a shortage of qualified staff and slow adoption of technologies. The research raises a number of concerns and issues, such as oversupply of warehousing space in China, competition from the influx of foreign 3PL companies into the country, and the impact of regulations on free trade zones, seaports and airports. These findings have important policy implications.

While China has gained a reputation as a cost effective place for manufacturing, logistical costs (about 18% of the cost of sales) in the country are still very high compared to other developed countries. For example, intercity toll charges amount to a high percentage of overall transportation costs.

Information technology (IT) expertise, employing the right people, and developing efficient processes, are ranked highly by the respondents as critical success factors for 3PLs operating in China. Most of the IT used in 3PL operations is quite basic transactional software, and there is little opportunity to integrate with supply chain partners. In order for local 3PLs to compete with their foreign counterparts, they will have to upgrade their existing IT systems and infrastructures to support e-commerce and ERP systems. Furthermore, 3PL processes today are silo-centric owing to current regulative constraints. However, as deregulation continues in the industry, 3PLs will need to open up their processes and integrate them with those of their customers’ and suppliers’.

The shortage of talent will take some time to resolve. According to the China Federation of Logistics and Purchasing, 3PLs suffer acute skill shortages in every operational and functional area. In their survey findings, there was a fundamental mismatch between the demands of employers and what the Chinese education system is turning out, with many more vocational jobs available at the bottom and relatively few jobs for managers.

Despite these problems, the Federation pointed out that every year around 400 universities in China will produce 100,000 graduates studying logistics as a major part of their degree, leading to an abundance of prospective candidates looking to enter the sector at the managerial level. In contrast, only 90,000 graduates with relevant qualifications left 800 secondary vocational colleges to fill the far more numerous lower-level roles. This problem gets worse as more and more parents are looking for their only child to go to university and not college.

Supply chain outsourcing is one of the trends identified during the focus group interview. The objectives are to identify the key improvements that 3PL customers are looking for in this area, and to look at the challenges and problems 3PLs face in implementing supply chain outsourcing. The pace of outsourcing is increasing according to the respondents, as demand for faster delivery services rises, product life cycles become shorter, and there is increased awareness of supply chain management issues.

Customer service, cost reduction, productivity and efficiency emerged as key features that warrant improvement during the interviews. Cost reduction was ranked as the most important factor and considered critical to gaining competitive advantage. China is perceived to offer the lowest costs in production and thus it is logical for companies to control their inbound and outbound logistics costs. When asked which supply chain activities are essential to achieving greater cost reduction, the most common replies pointed out to inventory management.

When queried about 3PL international network, all the respondents unanimously pointed to the need to expand their network to provide greater and better coverage for their clients. An important observation is that most local 3PL companies in China have adopted different expansion plans. In contrast, none of the local 3PL companies was observed to actively consider mergers and acquisitions as a path for expansion. Their preferred choices are to expand organically initially or to form strategic alliances with local or foreign firms.

This article was written by Dr. Albert Tan, Director of Education, Malaysia Institute for Supply Chain Innovation (MISI). For more information on the research described in this article contact the author who was involved in the study.

The article is published in the winter 2015 issue of Supply Chain Frontiers. See this issue of the newsletter and subscribe for free here.